In today’s note, Art Cashin (UBS Director of Floor Operations at NYSE) commented on hedge fund activity in the real estate space over the past couple months and recent deals over the last couple days as reported by Reuters and Bloomberg.
I shot several of the articles over to one of the very smartest members of the FoF (who has run a hedge fund). This was his very interesting interpretation:
The more headlines I see like this, the more I think these mega fund managers (KKR,Carlyle,Blackstone,Apollo) are gearing for the next leg of the MACRO economy. My opinion, this aggressive move into real estate is not just allocating capital to take advantage of a distressed sector. Funds managing $50 to 100 billion and more in some cases have determined that there is just not enough hedging product (CDS, options) to offset massive positions in private equity, credit, etc. I believe they have made the bet that economic theory has not changed that much in 500 years and the next leg will be much higher interest rates and consequently inflation. What is the poor fund manager to do when he has been forced to hold largely illiquid securities(private equity,credit)? Find a hedge. With none available at 35,000 feet you move to 70,000 feet. Hard assets combined with LONG term financing. I would guess that these funds are borrowing as much as possible in the debt markets for as long a duration is possible. (Not just funds, Disney and others have 100 year bonds)
Conclusion, smart money is betting on coming inflation, possibly hyper-inflation. Hard assets and long term borrowing prudent at this point. Thesis supports a bid under real estate, so bubble is not imminent. Buy as much real estate as possible, borrow as much as possible (FIXED RATE), for as long a duration as possible. And of course, stay very nimble with a tip of the hat……
We’ll be watching these developments carefully for several reasons. First is – if so many people do the same thing at the same moment, warning flags go up. Second – if this is a play on inflation/hyperinflation, what are they seeing that the Fed (and the gold market) are not? More to come. (Cashin/UBS)
Definitely some interesting activity and something to keep in mind.